Cost pressure keeps big NBFCs away from launching credit cards despite RBI provision

In June, DBS Bank India launched its first credit card, in partnership with Bajaj Finance.

Leading NBFCs continue to focus on conventional lending products such as consumer durable finance and personal loans rather than building their own credit-card infrastructure, said Aniket Dani, director at CRISIL Research.

At an aggregate level, the two verticals posted yearly credit growth of more than 40 percent for NBFCs in FY22. In FY23, verticals like consumer durable finance and personal loans will likely grow by another 35-40 percent, he said.

According to an August report by PricewaterhouseCoopers (PwC), credit card issuance has grown at a compound annual growth rate (CAGR) of 20 percent in the last four years. The number of credit cardholders increased from 29 million in March 2017 to 62 million in March 2021.

Banks, followed by non-banking financial companies that are their subsidiaries like SBI Cards and BoB Financial Solutions, are the largest issuers of credit cards in India.

On May 6, Moneycontrol reported that Canara Bank was in initial talks to set up a separate credit-card subsidiary and that an announcement is likely in the two quarters.

What do NBFCs say?

Credit cards are a very “banking product”, said Ramesh Iyer, Vice Chairman and Managing Director of M&M Finance.

“We are still understanding as to what the right way is to issue (credit cards). Should we be on our own, should we partner with somebody and offer co-branded cards…so it is still a little away from where we want to be… once we have made up our mind how we want to pursue this, we will surely come back,” Iyer told Moneycontrol.

Shriram City Union Finance Managing Director (MD) and CEO YS Chakravarti said the company was evaluating its options.

“That is not a priority for us because we have other products that we need to focus on and build business here…. The tech team is looking at it, but if it happens probably post-merger (with Shriram Transport Finance), we will take a serious call on it.  But as of now, it is not a priority,” the MD said.

Any new product launch by a financial institution is a well-thought-through process and requires a detailed study, said Manish Chaudhari, president of Poonawalla Fincorp.

While the regulator has issued guidelines, NBFCs need to work on complete business models because the launch of credit cards requires a lot of investment and risk management capabilities, Chaudhari said.

“With guidelines in, players will take at least a year to plan it and firm it up before applying for it. So, a lag of nine to 12 months is expected,” he said.

Chaudhari added that the NBFC was excited about cashless payments and the card business as it “ticks the right boxes”.

Bajaj Finance and L&T Finance did not offer comments for this story.

Way ahead 

“Some large NBFCs have existing co-branding arrangements with banks. One may see some of the entities apply for the credit card licence once the tenure of the existing co-branding arrangement ends,” said AM Karthik, vice president of financial sector ratings at ICRA.

According to Chaudhari, once NBFCs have done their internal work around a credit-card business model, they will have a clear answer on whether they will apply for a licence.

“At this point in time, I would say NBFCs who run co-branded cards will not move away from it, as own card issuance would require investing in capability building which is time-consuming,” he said.

Some NBFCs that were using the prepaid card route to issue credit have gone back to the drawing board to figure their business model out and as things become more clearer, NBFCs’ move towards credit cards may gather pace, Chaudhari said.

“Before the RBI’s recent directive on non-bank prepaid payment instruments, several lenders and fintechs were also extending credit lines through buy now pay later options. This business model will undergo a significant shift and players will realign their lending models to comply with the regulation,” Dani said.

“However, for large players, the strategy of increasing market share in conventional lending products and expanding reach for co-branded cards seems to be working well for now,” he added.